Weekly Insights #19

February 15: This week we’ve seen the crypto market rebound by 8% on average. JP Morgan has announced a new cryptocurrency, JPM Coin, that makes us further question the need for XRP’s existence, and the first U.S. pension funds have expanded their offerings to crypto investing. Additionally, we explain the current situation with Ethereum’s Ice Age and the changes to its network that the upcoming Constantinople upgrade will bring.

NOTEWORTHY NEWS

The first fiatcoin (fiat-based stablecoin) created by a major U.S. bank is here — and it’s from J.P. Morgan Chase. JPM Coin is a 1:1 USD-backed token hosted on Quorum, JPM’s private Ethereum network. The main use case for the token will be international payment settlement for sizeable corporate clients, but it might also serve as a tokenized fiat currency in their permissioned network. JPM previously tested debt issuance on the blockchain, and it is expected that the majority of traditional financial products will be tokenized to take advantage of the obvious advantages of private blockchain networks compared to the current infrastructure, which is very rigid and slow. Tokenized USD will be used to transact with these tokenized products. Initially, only a tiny fraction of payments will be transmitted using the token, but this trial represents the first real-world use of a digital coin by a major U.S. investment bank.

Nasdaq will offer two new crypto indices for bitcoin and ether, starting on February 25. The Bitcoin Liquid Index (BLX) and Ethereum Liquid Index (ELX) will offer spot price information on their Nasdaq Global Index Data Service. Both indices will reference the price of one coin quoted in USD, based on the most liquid markets.

First U.S. Pension Funds Take the Plunge on Crypto Investing — Feb 12, Bloomberg

Morgan Creek Digital, founded by Anthony Pompliano, has achieved the first investment in the crypto asset class from a U.S. pension fund. Two out of three defined benefit pension plans managed by Fairfax County Retirement Systems have invested in the Morgan Creek Digital fund. Pompliano’s new fund is structured as a traditional VC fund, investing in equity of companies in the blockchain industry, but also holds a small allocation of liquid cryptocurrencies.

OUR OPINION: The emergence of crypto brought us a new asset class, but also a completely new industry of products based around blockchain technology. It will be very common for diversified investment vehicles to have exposure to companies in the industry or to the crypto asset class directly.

In the pursuit of control of their citizens and cash flows eager to leave the country, Maduro’s government has introduced a new 15% cryptocurrency transaction tax. They also implemented restrictions on monthly transaction amounts. The basic limit is $600; a request can be submitted for permission to send more, but there is a hard limit of $3,000.

OUR OPINION: This kind of government behavior is exactly why we need permissionless money. While governments can set any laws and restrictions they choose, the main advantage of crypto is that they do not have a physical means of restricting cash flows or bank withdrawals compared to traditional banking infrastructure and fiat.

DIGITAL ASSETS ON THE MOVE

The recent news about J.P. Morgan tokenizing USD on their permissioned Ethereum network Quorum for settlements and for transacting with tokenized financial products means direct competition to the Ripple Network. But they are not the only large traditional financial institution working on a private blockchain network for this purposes. Recently, HSBC reported 25% savings QoQ in forex trade settlement using a permissioned blockchain. Together with a dozen other banks, HSBC launched their network, eTrade Connect, at the end of October 2018. Financial institutions understand that the market for international settlements and financial product tokenization is huge, and they are actively working to deliver the best permissioned network.

Now that it is clear that financial institutions are not interested in using Ripple and are developing their own private networks instead, let’s compare the Ripple Network and Quorum.

Ethereum has proven to be very useful for both fungible and non-fungible token issuance, two token types that cover the majority of tokenization of financial assets, derivatives, and commodities. Quorum is Ethereum-based, meaning anything the developers of public Ethereum develop can be implemented into their network without significant modification. This will enable them to save a lot on R&D costs compared to Ripple, which has their own technology that only they use and no one except Ripple Labs develops for.

Ripple is eagerly trying to convince the business environment to use their XRP token as a settlement vehicle in order to maintain its overvalued market price, but close to zero corporations have shown real interest in adopting it. Ripple says that XRP is a native token to their network, which is not true, as a native token is required by permissionless public blockchain networks to incentivize miners to produce blocks and secure the network. JPM Coin is just tokenized USD and will be used to transact with and trade tokenized financial products. Thus, XRP has no real purpose in the network, while JPM Coin is just a vehicle that represents 1 USD. In addition, about 60–80% of the total XRP supply is held by Ripple institutions and founders. Why would anyone choose to use XRP over JPM Coin when counterparty risk exists in both cases?

In the financial world, track record and trust are the essences of business. After the great financial crisis, there were attempts to create rating agencies outside of US jurisdiction — for good reason, as the US agencies clearly did not serve their mission, giving false ratings to investment banks that were later bailed out. The problem with these rating agencies was that nobody trusted them, as a rating from an agency with 100 years of history is more meaningful than a rating from a newly established agency, regardless of recent mistakes. The same goes for Quorum and the Ripple Network. Financial institutions and governments will always prefer working with J.P. Morgan over Ripple Labs.

The Ripple Network is becoming obsolete because financial institutions will always prefer a business partner they are familiar with as the market is becoming more saturated. The XRP token was always obsolete, just a trick that earned large amounts of money for Ripple Labs and their founders.

THE WEEK AHEAD

Ethereum’s Ice Age Kicking In

The Ice Age is a difficulty adjustment algorithm built into Ethereum to ensure that everyone — from miners to developers — has an incentive to upgrade to the latest version of the blockchain in the form of planned hard forks down the line. The Ice Age is programmed to raise difficulty exponentially, which we can see becoming apparent on February 10 in the chart below, as the block time rose above the 20 seconds and the ETH mined per day dropped to 13k. The Constantinople upgrade is scheduled for block number 7,280,000, which is expected to be mined in the early morning hours of March 1 (UTC). One of the network changes of the upcoming Constantinople upgrade was to reduce the ETH issuance rate, but due to the upgrade delay, the difficulty bomb started to kick in, which increased the block time and reduced daily aggregated block rewards. The March 1 fork will now slightly increase the effective daily issuance by roughly 30% instead of decreasing it. The long-term effect of block reward reduction will still have an impact on the price and network hashrate.

MARKET OVERVIEW & METRICS

Weekly Crypto Stats

Bitcoin dominance is 52.7%, with -1.1% weekly delta, and beta of 0.81.

Ethereum dominance is 10.6% with 8.1% weekly delta, and beta of 1.30.

Bitcoin hashrate is 42.5B TH/s, with -15.5% weekly delta.

Ethereum hashrate is 135.4K GH/s, with -2.8% weekly delta.

CHART OF THE WEEK

A ‘Realized Capitalization’ chart that approximates what was paid for all the bitcoins in circulation. Right now, as an aggregate, investors are underwater, and as Willy Woo stated, “For savvy long term investors this is an exciting time. BTC is seldom underwater.”

This content has been put together by Marko Štemberger and Tilen Držan. Feel free to contact us for any feedback or if you have questions.

Information provided above is not to be considered as an investment advice.

ANNOUNCEMENT

Block Analitica, the company behind Squared Capital, has just launched its digital asset metrics dashboard to the public. Though still in beta, if you are interested in a more in-depth analysis of blockchain fundamentals — everything that’s happening with stablecoins, development activity, exchange balances, and much more — we invite you toregister for a free account.